Since 1875 the UK market has seen negative annual returns only twice in the fifth year of the decade. As can be seen in the accompanying chart, since 1875 the down years were 1915 and 1945 (and 1945 was down only 0.6%).

As of the close 24th December the FTSE All-Share index was at 3449.5, (2.4% below its 2014 close of 3532.7).

The market has three days to climb above 3532.7 and end the year in positive territory.

Update

The answer to the heading is: yes. The FTSE All-Share index ended 2015 at 3447.46: down 2.41% on the year.

The FOMC meets next week to decide its policy on interest rates. The question is whether they will hike rates (probably yes). If they do it will be the first rate increase for nine years (the last rate increase was June 2006).

The question for UK investors is what might be the effect on UK equities if the FOMC decides to increase rates next week?

The following chart compares the FTSE All-Share Index with the effective federal funds rate for the period 1954-2006. The FTSE All-Share Index is plotted with a log scale (more appropriate for long periods such as this). The vertical grey bars highlight nine times when interest rates were increased after periods of monetary loosening.

From the chart it can be seen that in six cases the UK market rose following a turn in the monetary policy cycle when rates were first increased; and in three cases the UK market fell afterwards.

However, there has been no precedent for what happens after nine years of a zero interest rate policy.

The following chart plots the annual returns of the FTSE All-Share Index since 1900.

[NB. The values for 1973 and 1974 were respectively -55% and 136%, and have been truncated in the chart to make the scale more useful.]

The Index is currently 2.3% below its starting value for the year. If the Index ends the year in negative territory it will be the second successive year the UK equity market will have fallen.

As can be seen from the chart, this is a fairly rare occurrence. The previous time the market fell in two successive years was during the aftermath of the internet bubble, and before that in 1972-73.

The following chart plots the frequency distribution of the annual returns of the FTSE All-Share Index since 1900. For example, the annual return for the Index has been in the range 5%-10% for 15 years since 1900.

The following table shows the annual (percentage) performance of the FTSE All Share Index since 1801. The table is arranged to compare the performance of the market for the same year in each decade. For example, in the third year of the 1801-1810 decade (1803), the market fell 21.9%, while in the third year of the 1811-1820 decade (1813), the market fell 0.2%. Years are highlighted in which the market fell.

Observations

Since 1801 the strongest years have been the 2nd, 3rd, and 5th years in the decades. The market has risen 14 out of the 21 decades in these years, with an average annual return over 4%. But the single year champion has got to be the 5th year in each decade which has risen an average of 9.2%.

The stand-out weakest year in the decade since 1801 has been the 10th – this is the only year to have risen less than 10 times in the 21 decades, and also the only year to have a negative average return (-1.2%).

Generally, performance in the more recent decades has not changed too much from the long-term picture. In the six decades since 1951, the strong years are still the 3rd, and 5th years, although now also joined by the 7th and 9th years. The dominance of the 5th year is greater than ever – the only year to rise in every decade since 1951. And the 10th year continues to be weakest, with positive returns only twice in the past six decades.

Extract taken from the newly published The UK Stock Market Almanac 2016.

The following chart shows the performance of the main UK stock market indices in the first quarter 2015.

The relative performance was fairly typical for a first quarter (e.g. 2014 1Q). For example, small and mid-caps (e.g. FTSE Fledgling, FTSE 250 and FTSE SmallCap) greatly outperformed the large caps (FTSE 100).

The Sell in May effect (also known as the Halloween or Six Month effects) describes the tendency of the stock market to perform strongly in the period November to April in comparison to the period May-October. This effect has been observed in markets worldwide and has existed for many decades.

The following charts analyse this effect by looking at the performance of three portfolios:

All Year portfolio – this portfolio is 100% invested in the FTSE All Share Index all year round

Winter portfolio – is 100% invested in the FTSE All Share Index only in the months November to April (and is out of the market for the other half of the year).

Summer portfolio – is 100% invested in the FTSE All Share Index only in the months May to October (and is out of the market for the other half of the year).

Cumulative returns

The following three charts plot the performance of the three portfolios to the present day from 1984, 1994 and 2004.

As can be seen the divergence in performance between the Winter and Summer portfolios is quite remarkable.

CAGR

The following chart partly summarises the performance by plotting the CAGR (compound annual growth rate) for the portfolios over the three periods.

The two features to note are the CAGR for the Winter portfolio is greater than the CAGR for the All Year portfolio for all three periods, and that the CAGRs for the Summer portfolio are negative for all three periods studied.

Volatility

The following chart shows the volatility of the three portfolios over the three periods. In this case volatility is calculated as the standard deviation of the portfolio daily returns.

The features to note here are that the Winter portfolio consistently has the lowest volatility in each period, while the Summer portfolio has the highest. An explanation for this might be that the most volatile period of the year for the stock market has historically been September-October.

So, beyond superior returns, a feature of the Winter portfolio is that it avoids the most volatile period of the year..

Sharpe Ratio

The following chart to some extent combines the previous two into one by plotting the Sharpe Ratio for the three portfolios over the three periods. The Sharpe Ratio is one method of measuring the risk-adjusted returns of a portfolio.

With its superior returns and lower volatility the Winter portfolio can be seen to quite easily have the highest Sharpe Ratios for all three periods studied.